Nonprofit Q & A: Unrelated Business Income

Nonprofit Q & A: Unrelated Business Income

Q: We are a small 501(c)(3) public charity that helps children develop reading and math skills. For Federal income tax compliance, we only file the e-postcard. We also publish an annual calendar and bi-monthly newsletter about our activities and other newsworthy information relevant to our exempt purpose.  In these publications, we’re selling advertising space to our sponsors and neighborhood businesses. Our accountant says that we may need to pay Unrelated Business Income tax or at least file a Form 990-T to report the advertising income. Since we don’t charge tuition for our programs, and this sponsorship revenue helps us buy books and materials for the children, isn’t this revenue related to our exempt purposes?   A: Advertising usually generates unrelated business income (UBI). This is because advertising usually meets all three UBI tests: It is (1) regularly carried on, (2) it is a trade or business, and (3) it is substantially unrelated to the organization’s exempt purpose, aside from the need to generate income. That said, there can be exceptions and exclusions. For this writing, let’s assume you have determined that your advertising activities meet the first two basic UBI tests mentioned above: It is (1) regularly carried on, and (2) it is a trade or business. Let’s assume it’s also carried on to produce revenue, is conducted with the same frequency and continuity, and is pursued in a manner similar to commercial nonexempt businesses. Now, let’s explore the rare circumstances wherein an advertising activity can be related to the exempt purpose. To be so related, the revenue-generating activity must contribute importantly to accomplishing the organization’s exempt purpose, other than the...
Nonprofit Q & A: Unrelated Business Income

Nonprofit Q & A: Unrelated Business Income

Q: We are a small 501(c)(3) public charity that helps children develop reading and math skills. For Federal income tax compliance, we only file the e-postcard. We also publish an annual calendar and bi-monthly newsletter about our activities and other newsworthy information relevant to our exempt purpose. In these publications, we’re selling advertising space to our sponsors and neighborhood businesses. Our accountant says that we may need to pay Unrelated Business Income tax or at least file a Form 990-T to report the advertising income. Since we don’t charge tuition for our programs, and this sponsorship revenue helps us buy books and materials for the children, isn’t this revenue related to our exempt purposes? A: Advertising usually generates unrelated business income (UBI). This is because advertising usually meets all three UBI tests: It is (1) regularly carried on, (2) it is a trade or business, and (3) it is substantially unrelated to the organization’s exempt purpose, aside from the need to generate income. That said, there can be exceptions and exclusions. For this writing, let’s assume you have determined that your advertising activities meet the first two basic UBI tests mentioned above: It is (1) regularly carried on, and (2) it is a trade or business. Let’s assume it’s also carried on to produce revenue, is conducted with the same frequency and continuity, and is pursued in a manner similar to commercial nonexempt businesses. Now, let’s explore the rare circumstances wherein an advertising activity can be related to the exempt purpose. To be so related, the revenue-generating activity must contribute importantly to accomplishing the organization’s exempt purpose, other than the organization’s...
Changes to the Not-for-Profit Financial Reporting Model with ASU 2016-14

Changes to the Not-for-Profit Financial Reporting Model with ASU 2016-14

As part of the FASB’s project to improve on the current financial reporting requirements for not-for-profit entities (NFP), they issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities in August 2016. This ASU is the first phase of the two-phase FASB project aimed at providing more useful information to donors, grantors, creditors and other users of an NFP’s financial statements, while also reducing the challenges and costs for preparers and users of financial statements. Below we’ve included some of the main provisions of this new standard.   Classes of Net Assets Under the new standard, the three classes of net assets currently presented in the financial statements of NFPs (unrestricted, temporarily restricted, and permanently restricted) will be replaced with two classes of net assets (net assets with donor restrictions and net assets without donor restrictions). As there was no real change in the definition of what a donor-imposed restriction is with this ASU, the effect of this change will generally be that temporarily restricted net assets and permanently restricted net assets under current GAAP are combined to become one class called net assets with donor restrictions. Unrestricted net assets under current GAAP will be referred to as net assets without donor restrictions. The two classes of net assets will be presented on the face of the statement of financial position along with the currently required amount for total net assets. The amount of the change in each of the two classes of net assets will be presented on the statement of activities, along with the currently required amount for the change...
IT Security & Crisis Communication: Protect Your Not-for-Profit’s Reputation and Security

IT Security & Crisis Communication: Protect Your Not-for-Profit’s Reputation and Security

In today’s technology-driven climate, security breaches can damage your not-for-profit’s reputation, professional relationships, and sensitive internal controls. Website breaches, social media hacking, and email fraud can lead to inaccurate, and often embarrassing, misrepresentations of your organization. How can your organization protect itself against a security breach, or minimize damage if one should occur? The key is to develop a preventative IT security plan and responsive crisis communication plan before a crisis takes place. Preparing for a Security Breach Create an IT Security Plan An IT security plan can help identify and eliminate most of your organization’s potential vulnerabilities. After evaluating your IT security strengths and weaknesses, your organization should apply the following steps to construct an effective security plan: Perform an inventory assessment of your NFP’s assets and determine what information or resources you are trying to protect. Complete a risk assessment to determine what level of security is needed to protect your information assets. Reference this checklist to determine your organization’s security strengths and weaknesses. Complete an evaluation of your findings and discuss recommendations for correcting insufficiencies and/or improving security. Create your security plan, including target implementation dates. Determine which department and team member are responsible for each element of the plan Establish target completion dates, and begin monitoring your progress through improvement reports and security initiatives. Create a Crisis Communication Plan To establish an effective crisis communication plan, your organization must first develop a communications strategy based on the organization’s policies and procedures. This strategy should be linked to your organization’s data management program and monitored by your IT general controls. Organizing your communication plan in this way allows you to notice, and address,...
Tax Reform Update for Nonprofit Organizations

Tax Reform Update for Nonprofit Organizations

With the recent tax reform legislation of the 2017 Tax Cuts and Jobs Act (TCJA), there are many questions about how the changes impact Non-Profit Organizations (NPOs). We have summarized several key provisions that most directly affect NPOs. Unless otherwise noted, all of these provisions were effective on January 1, 2018. IMPACTS TO CHARITABLE GIVING Standard Deduction Increase For 2018, the standard deduction will be $24,000 for married couples filing jointly, $18,000 for unmarried individuals with at least one qualifying child, and $12,000 for single taxpayers. The standard deductions were increased substantially from 2017. While this provision directly benefits most individual taxpayers, NPOs could be negatively affected by this change. With an increase to the standard deduction, as well as less favorable itemized deduction regulations, there are less incentives for individuals to itemize their deductions. Charitable contributions are among the deductions includable when taxpayers elect to itemize. There is some concern by NPOs that since some taxpayers will no longer be receiving a tax benefit for their charitable deduction, they may be less inclined to donate. On the other hand, individual taxpayers may have more disposal income as a result of the tax reform, which may increase charitable contributions. As for the actual impact on NPOs, only time will tell for certain. Cash Contribution Limitations The previous tax regulations allowed for individuals to deduct cash charitable contributions up to 50% of their Adjusted Gross Income (AGI). The TCJA increased that threshold to 60% of AGI. While the 10% increase is substantial, the pool of taxpayers whom give 50% (or 60%) of their AGI is very limited. Estate Tax Changes Under the TCJA, each individual can...
2018 Nonprofit Pay & Benefits Survey Now Open for Participation

2018 Nonprofit Pay & Benefits Survey Now Open for Participation

We are pleased to announce that we have partnered with Cascade Employers Association to sponsor their 2018 Nonprofit Pay & Benefits Survey. We recognize the need for real-time compensation and benefit information for the nonprofit community, and our hope is that this partnership will result in increased survey participation and improved accessibility to survey data. Cascades Nonprofit Pay and Benefits Survey officially launched in February of 2017. In its first year, 118 local nonprofits participated, making the survey a valuable, reliable local resource throughout Oregon and SW Washington. This year, Cascade’s 2018 Nonprofit Pay and Benefits Survey launched March 1st and is open now for participation. It will survey over 250 nonprofit jobs and include over 100 benefit related questions. As like-minded organizations, we have long recognized the importance of smart business decisions for all organizations when it comes to human capital, and this is just as true for the nonprofit world. It is our belief that sponsoring Cascade’s 2018 Nonprofit Pay and Benefits Survey will help to create and promote the information and services available to nonprofits. This will help to increase nonprofit’s visibility as not only mission-driven but equally business minded. To learn more, or to participate, please visit Cascade’s 2018 Nonprofit Pay & Benefits Survey webpage. The survey will be open for participation on March 1st and results will be published in June. About Cascade Employers Association Cascade Employers Association is a member-based resource for over 430 Northwest employers committed to developing a strong, vital workforce. Cascade works with organizations who know a prosperous business is built on their people and offers services from hiring well,...